Restraint of trade | ‘A’, a Doctor, employed another Doctor ‘B’ as assistant for a period of 3 years on a salary of Rs. 3,000/- per mensem. There was an agreement between ‘A’ & ‘B’ which provided that after the termination of his employment, ‘B’ shall not practice as a Doctor… ‘A’, thereupon, sued ‘B’ for the recovery of Rs. 50,000/-. Decide.

Question: Restraint of trade | ‘A’, a Doctor, employed another Doctor ‘B’ as assistant for a period of 3 years on a salary of Rs. 3,000/- per mensem. There was an agreement between ‘A’ & ‘B’ which provided that after the termination of his employment, ‘B’ shall not practice as a Doctor within a radius of 3 km of ‘A’s dispensary for a period of three years and if ‘B’ did so, ‘B’ should pay Rs. 50,000/- as liquidated damages.

Immediately after the termination of his employment, ‘B’ started his practice as a Doctor next to A’ dispensary. ‘A’, thereupon, sued ‘B’ for the recovery of Rs. 50,000/-. Decide. [DJS 2007]

Find the answer to the mains question only on Legal Bites. [Restraint of trade | ‘A’, a Doctor, employed another Doctor ‘B’ as assistant for a period of 3 years on a salary of Rs. 3,000/- per mensem. There was an agreement between ‘A’ & ‘B’ which provided that after the termination of his employment, ‘B’ shall not practice as a Doctor… ‘A’, thereupon, sued ‘B’ for the recovery of Rs. 50,000/-. Decide.]

Answer

Section 27 of the Indian Contract Act,1872 lays down the provision regarding the agreement in restraint of trade void. It clearly states that “Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”

Exception 1.—Saving of agreement not to carry on the business of which goodwill is sold.—One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein:

Provided that such limits appear to the Court reasonable, regard being had to the nature of the business.

All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy and void. That is the general rule. But there are exceptions. Restraint of trade… may be justified by the special circumstances of a particular case. The only justification is that the restriction should be reasonable—reasonable in reference to the interest of the parties and reasonable in reference to the public interest. The restriction should be so framed and guarded as to afford adequate protection to the party in whose favor it is imposed while at the same time it is in no way injurious to the public.

Thus, in India Charlesworth v. Mac Donald, [ILR (1898) 23 Bom 103] A agreed to become an assistant for three years to ‘B’ who was a physician and surgeon practicing at Zanzibar. The appointment was subject to the clause against practicing. A left the service within a year and began to practice there on his own account. But he was restrained from doing so during the period of three years.

Farran C.J. explained the principle thus: “An agreement of this class does not fall within Section 27. If it did, all contracts of personal service for a fixed period would be void. An agreement to serve exclusively for a week, a day, or even for an hour, necessarily prevents the person so agreeing to serve from exercising his calling during that period for anyone else than the person with whom he so agrees.

Electrosteel Castings Ltd v. Saw Pipes Ltd, [(2005) 1 CHN 612], where an employee agrees with his employer, e.g. to work with him faithfully for five years and not to work with any competitor during that period. The court said: The clause is a good one because it is not in restraint of any profession, trade, or business.

The restriction against working with a competitor during the period of one’s parent employment is not a restriction against profession but is a restriction against breach of faith and loyalty. A whole-time employee, if he is to be diligent and loyal, can obviously serve only one master. The clause only enforces this condition of employment and is not in reality restrictive.

Applying the aforesaid principles and rationale of judgments to the present case at hand, where ‘A’, a Doctor, employed another Doctor ‘B’ as assistant for a period of 3 years on a salary of Rs. 3,000/- and reached to a with ‘B’ that even after the termination of his employment, ‘B’ shall not practice as a Doctor within a radius of 3 km of ‘A’s dispensary for a period of three years, and if ‘B’ did so, ‘B’ should pay Rs. 50,000/- as liquidated damages.

The restraint would not be hit by Section 27 of the Contract Act. Such restraint on professionals is reasonable and hence upon violation of the terms of agreement ‘B’ is liable to pay Rs. 50,000/- to ‘A’.

---

Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
2. Law of Contract Mains Questions Series Part-II
3. Law of Contract Mains Questions Series Part-III
4. Law of Contract Mains Questions Series Part-IV
5. Law of Contract Mains Questions Series Part-V
6. Law of Contract Mains Questions Series Part-VI
7. Law of Contract Mains Questions Series Part-VII
8. Law of Contract Mains Questions Series Part-VIII
9. Law of Contract Mains Questions Series Part-IX
10. Law of Contract Mains Questions Series Part-X